For the year ended 2020, ABC Company has $1,250,000 of debt with an annual interest rate of
Question:
For the year ended 2020, ABC Company has $1,250,000 of debt with an annual interest rate of 6.2%, $2,000,000 of preferred stock with an annual preferred dividend rate of 8.2%, $3,500,000 of common stock (total book value), and 250,000 common shares outstanding.
In 2021, the company plans to raise $500,000 external capital to fund a new project through a term loan with an interest rate of 7.3%. The new loan's sinking fund provision requires the loan to be fully amortized over the next 5 years, commencing in 2022. The company expects that the existing debt and preferred stock will not be retired until the year 2026; hence, they will remain in the same amount in 2021. If the project goes as planned, the company expects $1,200,000 of EBIT in 2021. The company's tax rate is 40%.
What will the expected earnings per share under the new debt alternative be? (Hint: Perform EBIT-EPS Analysis in the long-term financing decisions.)
Advanced Accounting
ISBN: 9781260247824
14th Edition
Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik